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A blog discussing the macro forces shaping the global economy today and over the horizon.

If This Is Globalization 4.0, What Were the Other Three?

“Globalization 4.0 has only just begun, but we are already vastly underprepared for it,” wrote Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, last month when announcing the theme of Davos 2019.

In the world of buzzwords, Globalization 4.0 was sure to follow Industry 4.0 (which referred to the digitization of manufacturing). Indeed, the former term has been used before here and here. The phrase raises two issues for international economists:

Is there substance to the new label, or is it just a distinction without a difference?

If the fourth globalization is upon us, what were the first three?

Is there really a difference? (Spoiler: yes)

I believe that future globalization will be very different from the globalization we know today, and the globalization we have known in the past. Moreover, it is coming incredibly fast – and in ways few people expect.

Converging moments

In fact, I believe this strongly enough to have written a book on the theme, which will – strangely enough – appear just in time for the Davos meeting in January 2019.

Here’s my economic reasoning in a nutshell. Arbitrage drives globalization. Whenever relative prices differ across countries, people can make money with a two-way, buy-low-sell-high arbitrage. When it comes to goods, the arbitrage is called trade.

For centuries, technological limits meant that the arbitrage mostly took place in goods. Globalization mostly meant goods crossing borders.

From around 1990, information and communication technology (ICT) made a different type of arbitrage possible: factories crossing borders.

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“Arbitrage drives globalization. When it comes to goods, the arbitrage is called trade.”

The coordination technology allowed G7 firms to spread some stages of production to nearby developing nations while still keeping the whole production process running smoothly and reliably. The vast wage differences made this manufacturing-location arbitrage profitable.

The greatest remaining global arbitrage opportunities are wage rates in the service sector. Pay for similar tasks routinely differ by 10 times across countries. That’s a 10,000-percent difference – a very tempting arbitrage opportunity. Yet up until now, few firms could arbitrage those differences due to technical barriers.

The basic problem has to do with the fundamental reality of service and professional jobs. Face-to-face interaction is necessary for many of these. Until recently, the state of technology made the cost of overcoming these barriers prohibitively high. But digital technology is changing that reality. Digital technology – or digitech, for short – is tearing down the barriers to wage arbitrage in the service sector.

This new form of globalization – this new wage arbitrage, if you will – is being enabled by international freelancing platforms like Upwork.com, by advanced telecommunications technology and by machine translation (as I pointed out in a previous blog post).

In the broader perspective on economic globalization that I’ve been pushing since 2006, telemigration is the “third unbundling.” The first unbundling was trade in goods, which was spurred from the 1800s by a steep fall in the cost of moving goods.

The second unbundling was the geographic separation unleashed by ICT. That makes the coming globalization the third unbundling; the geographic separation of labor and labor services via digitech that makes remote workers seem less remote. This begs the question – how did we get all the way to Globalization 4.0 if there have been only three unbundlings?

Globalization 1.0 was pre-World War I globalization, which was launched by a historic drop in trade costs when steam and other forms of mechanical power made it economical to consume goods made faraway. This globalization came with almost no government support.

There was no global governance unless you count the British Navy as the UN, the Bank of England as the IMF and Britain’s free trade stance as the WTO. And there was little domestic policy to help share the gains and pains of more intense international arbitrage in goods.

Globalization back then fanned the fortunes of a nation’s most competitive citizens and companies but fractured the fortunes of a nation’s least competitive citizens and companies. It took place in the context of bare-knuckled economic systems (laissez-faire capitalism, imperialism and various forms of autocracy). That combination did not end well. Two world wars, the Great Depression and the rise of communism and fascism resulted in hundreds of millions of humans being killed by other humans.

A resolution was eventually found. Capitalism’s face was softened with the New Deal in the U.S., and social market democracy in other rich economies. In another large slice of the world, communism softened into a kinder, gentler version. Taken together we can view this as a distinct phase – call it Globalization 2.0.

Globalization 2.0 is the post-World War II phase where trade in goods was combined with complementary domestic policies that helped share the pains and gains of globalization (and automation).

The market was in charge of efficiency. The government was in charge of justice. Internationally, Globalization 2.0 saw the establishment of institute-based, rule-based international governance, specifically the UN, IMF, World Bank, GATT/WTO and many specialized agencies like the Food and Agricultural Organization and International Labour Organization.

Globalization 3.0 is what I called the second unbundling or the New Globalization. Arvind Subramanian called it hyperglobalization, Gary Gereffi called it the global value chain revolution and Alan Blinder called it offshoring. The key is that globalization now meant factories crossing borders, and – critically – the know-how of G7 firms along with them.

This created a new world of manufacturing in which high tech was combined with low wages. This new combination disrupted the lives and communities of workers struggling to compete with high wages and high tech as well as those struggling to compete with low wages and low tech.

Workers employed in goods-producing sectors were the most affected, since this unbundling mostly affected goods-producing sectors. In particular, the monopoly that G7 factory workers had on G7 manufacturing technology was broken when their employers moved jobs and know-how abroad.

The next transition

Globalization 4.0 is what I call the third unbundling. It is what will happen when digitech allows arbitrage of international wage differences without the physical movement of workers.

While Globalization 1.0, 2.0 and 3.0 were mainly a concern of people who made things for a living (since globalization focused on things that we made), Globalization 4.0 is going to hit the service sector. Hundreds of millions of service-sector and professional workers in advanced economies will – for the first time ever – be exposed to the challenges and opportunities of globalization.

Every great transformation creates triumphs for those who can seize the opportunities and tragedies for those who can’t. Future globalization will bring us to a better world if we prepare for it.

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Richard Baldwin is Professor of International Economics at the Graduate Institute, Geneva. He was a Senior Staff Economist for the President's Council of Economic Advisers in the George H.W. Bush administration.